Your Planning Process, Tips for Remarrying, and Allocating Your Assets
Traditionally, women have been the caretakers of both the older and younger generations of their families. But providing care for family members is becoming increasingly difficult, as doing so may require a leave of absence from work and drain one’s bank account.
Such income disruptions greatly affect a woman’s ability to save money, plan for retirement, and maintain financial security. In addition, older married women often provide care for their elderly husbands.
But who will help you when you require assistance? Even though younger family members may be more than willing to help, the costs of health care often exceed the amount of disposable income available to the average family. Perhaps, women and their family members need to look toward the future and start their personal planning process.
YOUR PLANNING PROCESS
Every woman needs to balance her financial past with her financial future. By addressing the management of your personal finances as soon as possible, you can avoid disputes and build financial independence.
Here are a few things to think about as you start your financial planning process:
Durable Power of Attorney. This mechanism allows individuals to appoint a trusted relative or friend as a representative in legal and financial matters. The powers granted may be limited or broad in scope, and may vary from state to state. They remain in effect during disability or incompetence – although, in the event of incompetence, a guardian or conservator could revoke them. Some financial institutions are reluctant to recognize a durable power of attorney, so it is worthwhile to explore any potential problems beforehand.
Revocable and Irrevocable Trusts. A revocable trust allows you to retain control of your property, while delegating the responsibility for daily management to others. This arrangement gives you the flexibility to change the trust in any way, and at any time, as needs and circumstances dictate. As added protection, a revocable trust may remain unfunded as long as you are legally competent. On the other hand, when you reach a certain age and are willing to relinquish ownership of assets altogether, you may wish to consider establishing an irrevocable trust.
Informal Arrangements. You can also informally transfer property to your heirs, in many cases free of gift taxes, in exchange for being taken care of for the rest of your life. This arrangement, however, should be approached with extreme caution. Even with the best of intentions, it is possible that adult children could deplete assets through poor management, divorce, or creditor claims. Once the assets are gone, an aging parent could become dependent on the goodwill and financial circumstances of family members.
Review Your Plans Periodically. It may be necessary to periodically review these arrangements, as needs and circumstances change. You may also wish to consider consulting a financial professional with experience in concerns facing today’s women.
TIPS FOR REMARRYING
Women know that they need to plan for a time when they may be on their own. Through divorce, widowhood, or personal choice, the odds are high that a woman will be completely independent at some point in her lifetime.
Financial planning is essential for women throughout life, but it becomes especially important in the event of remarriage, as financial arrangements may need to be made for ex-spouses and children.
If you are in a second marriage or about to remarry, you may want to consider the following important points about managing your personal finances:
Bank Accounts. Should married couples combine their bank accounts or keep them separate? Or, perhaps combine certain accounts and keep others separate? There is no right or wrong choice – this is a personal decision. An open and honest discussion may reveal whether or not you and your spouse are financially compatible regarding spending habits, saving, investing, debt, etc. If there is a marked difference in the way you both handle money, then separating your finances may be a better plan.
Prior Debt. Will each spouse be responsible for the other’s prior debt, and if so, to what extent? Keeping the indebted spouse’s prior debt separate may help ensure that the other spouse’s property remains out of reach from creditors.
Property Acquired before Remarriage. Owning previously acquired property in your own name can prevent the risk of losing personal property to your spouse’s potential creditors. Also, doing so may have estate tax benefits. Keeping your property in your own name can help to minimize estate taxes while providing an inheritance for children from a previous marriage.
Home Ownership. Many married couples choose to title property jointly as tenants by entirety. When one spouse dies, the home passes to the surviving spouse tax-free. However, there may be estate tax consequences when the surviving spouse dies. Be sure to consult with a tax professional beforehand.
Retirement. Saving for retirement is one of the major financial goals for married couples. Women, in particular, have unique concerns when planning for retirement. First, women typically live longer than men, so their retirement income needs to last longer. In addition, women often spend more time out of the workforce than men as a result of caregiving responsibilities, and therefore are less likely to have pensions and full Social Security benefits. According to the U.S. Department of Labor, when women work, they typically earn less than their male counterparts. Consequently, the gap between gender incomes makes it especially important for women to prepare for retirement.
Insurance. Disability income insurance can help replace a portion of your income in the event you are unable to work due to sustaining an injury or illness. This type of insurance provides funds that can be used for bills and expenses. Similarly, life insurance provides a death benefit that can be used by your family. Proceeds can help ensure that children from a prior or current marriage can attend college, the mortgage can be paid, and the surviving spouse has some replacement income.
Estate Planning. It is important for blended families to plan for the final disposition of assets. Trusts can be a valuable tool to minimize estate taxes and to help ensure that your assets are distributed to heirs according to your wishes.
For example, at your death, your assets can pass to a trust, from which your surviving spouse will receive income without direct access to the assets.
At the death of the surviving spouse, the assets can then pass to children from your current or previous marriage. This provides ongoing income for your surviving spouse and an inheritance for your children, as well. In addition, if the surviving spouse later remarries, the trust can be designed to preclude your assets from their marital or community property.
ASSET ALLOCATION 101
Your portfolio can make you a lot of money – if you build it appropriately. As you hear everyone from your son’s basketball coach to your best friend from high-school to your retired in-law tossing this term around, here’s what asset allocation means and how you can use it to improve your investing.
Defined simply, asset allocation invests stocks and bonds in different and, crucially, uncorrelated asset classes in your portfolio.
When you build your financial plan, think hard about your asset allocation, the foundation of your portfolio. Choose a strategy you can stick with for the long term and not one that makes you move in and out of the market during volatile times. Remember, you can’t manage long- term returns without going through normal ups and downs of the market.
Moving in and out of the market, and thus forsaking your asset allocation model, can corrode your wealth. Why? Because you won’t be sticking to your plan and you’ll sell when markets go through rough patches and won’t be invested during the inevitable bounce back.
Do you wish you had a magic machine where you input your data, wait a few seconds and watch the device recommend how to allocate your assets? Unfortunately, no one formula specifies the right asset allocation.
Instead, consider these five factors when deciding how to allocate your assets.
1. Time. If you don’t want to withdraw from your investments for a long time, you might make more aggressive investment choices because you have a lot more time to recover from the ups and downs of the market. Also, keep in mind that various accounts can have different time horizons.
2. Cash in the Bank. How much money you keep in the bank ties in to your decisions about investment allocation. For example, if your bank accounts can cover your living expenses for the next five years, you most likely won’t need to touch your portfolio for that time. This means you might take more risk in your portfolio knowing you maintain ample cash backup. If you have little cash in the bank and you think you may need to draw from your portfolio, make less-risky moves with your market holdings.
3. Quantify the Downside. Calculating how much your portfolio can actually drop in a bad market helps your management. Look beyond just the return your portfolio might provide to focus on the downside risk, too. Again, you can’t generally achieve the return you want over the long term unless you stick with the portfolio through the market’s gyrations.
4. Allocate Other Assets. Look at your financial life as a whole and not piecemeal. Make sure you thoughtfully align all portfolios, such as taxable accounts and retirement accounts, to match your risk tolerance.
5. Stay With What You Want. No right answer exists as to which asset allocation you pick – just make sure you can stick with it for the long haul. Also remember that this decision is personal and specific to you.
The media, your colleagues and your friends do not know your risk tolerance and objectives, so make no moves based on the opinions of others. Instead, continue to evaluate your plan at least once a year to make sure it remains appropriate for you.
Getting your asset allocation choice in place from the start may be a good first step toward a confident financial strategy.
YOUR FINANCIAL PROFESSIONAL
One of the biggest mistakes that women make is becoming financially dependent on another person. It not only makes you vulnerable both emotionally and financially, but also exposes you to greater risk of bankruptcy.
Your financial professional can help you take back control of your financial life.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
Asset allocation does not ensure a profit or protect against a loss.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
This article was prepared by FMeX.
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